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Industry analysis

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INDUSTRY ANALYSIS BY AMLIN DAVID

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What is an Industry? Webster’s dictionary defines industry as “ a department or branch of a craft, art business, or manufacture.” And more specifically A group of productive or profit making enterprises or organizations that have a similar technological structure of production and that produce or supply technically substitutable goods, services, or sources of income

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Usefulness of Industry Analysis 1. Provides insight into the key sectors or subdivisions of overall economic activity that influence particular industries, and 2. To know the relative strength or weakness of particular industry or other groupings under specific sets of assumptions about that economic activity. The analyst with an economic forecast that he has developed from scratch, or a set of figures that he has developed from forecasts prepared by others is now ready to apply this information in an appropriate industry.

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Industry classification by product Industry classification by product does not present a terribly acute problem for the astute analyst when he is classifying firms with the basically one product or a homogeneous group of products. The problem worsens considerably, however, when he deals with a firm that has diversified its product line. Unfortunately, today the latter case is the rule rather than exception.

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Standard industrial classification In order to provide an organized reporting framework for the vast amount of data collected by the federal government, the SIC was developed. The SIC is the statistical classification standard underlying all establishment based federal economic status classified by industry

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The major groups detailed in the table and identified by two digitcodes are further subdivided into three- digit industry groups and,finally, into four digit industries

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Parameters of Industry Analysis Growth of the industry Profitability Nature of the product Nature of competition Government policies Availability of labor Research and development Index

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Industry classification according to business cycleAnother way of classifying industries is in a cyclical framework,that is how they react to upswings and downswings in theeconomy. The general classifications in the framework are growth,cyclical, defensive and cyclical growth.Growth industries are generally characterized by expectations ofabnormally high rates of expansion in earnings, often independentof the business cycle. Frequently this type of situation is associatedwith a major change in the state of technology or an innovativeway of doing or selling somethingCyclical industries are considered to be those most likely tobenefit from a period of economic prosperity and most likely tosuffer from a period of economic recession.

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Defensive industries are those, such as the food processingindustry, hurt least in periods f economic downswing. Defensiveindustries often contains firms whose securities an investor mighthold for income. Defensive stocks might even be consideredcountercyclical , because their earnings might very well expandwhile earnings of cyclical stocks are declining.The investment press and brokerage firms have coined yet anotherclassification, that of cyclical growth industries. Obviously, thesepossess characteristics of both a cyclical industry and growthindustry

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Key characteristics in an Industry Analysis Past sales and earnings performance Permanence of the industry Attitude of government towards the industry Labor conditions within the industry Competitive conditions as reflected in any barriers to entry that might exist Stock prices of firms in the industry relative to their earnings

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Industry life cycleThe life of an industry can be separated into1. Pioneering stage2. Expansion stage3. Stagnation stage4. Decay stage